The UK government’s budget announcement last week has caused concern for both existing and prospective property owners. A lot of media comment was subsequently made on how high value properties would be severely affected. Unfortunately, a lot of Asian based buyers may also be affected by the announcement, in some cases quite dramatically.
The UK government has certainly decided to get tough when it comes to stamp duty on expensive properties with the rate of Stamp Duty Land Tax on purchases of residential property over £2 million increasing from 5% to 7% from 22 March 2012. The rate for properties below this level remains the same.
Of interest to some overseas buyers is that if any ‘non-natural’ person, which includes a company, partnership etc., purchases a property for more than £2 million the stamp duty rate will be 15%. In the past investors have used companies to own property and have sold the company’s shares when disposing of the property. Under these circumstances Stamp Duty was only be charged at 0.5% and 0% if an offshore company had been used. The new rate means a minimum tax of £300,000, making it prohibitive to use such a structure.
Existing owners of such properties who are using a corporate structure may also be affected. The Government is talking about an annual Stamp Duty Land Tax for high value residential properties owned by non-natural person and this may come into effect from April 2013.
Whilst most Asian based buyers have not spent £2m on a property, it is worth noting the Government is considering imposing Capital Gains Tax on non-resident companies (BVI companies for example) that dispose of UK residential property. This potentially applies to all non-resident companies that own a residential property, not just those owning high value properties. The government wants to go through a period of consultation before committing to this, but if it is introduced it is likely to be in April 2013.
Of course, the devil is always in the detail. For example, no-one knows whether current values will be re-assessed prior to its introduction. What is certain is that if all non resident companies are taxed, a large number of Asian based investors will be severely affected. Advisers who advocated their clients use such an entity to own a relatively inexpensive London property as a means of avoiding inheritance tax will now need to identify what is now best for their clients. Of course, hindsight is always 20/20 vision and they will rightly argue that governments can change legislation at any time. Nevertheless, in these difficult economic times measures to curb tax avoidance were always going to be popular. Taking steps to discourage non-resident companies avoiding stamp duty and including them in the Capital Gains Tax net seems a logical step and one that could have been foreseen, with hindsight of course.
The good news is that there is no talk of offshore ‘natural persons’ being affected by the changes. London remains a safe and profitable haven in troubled times – just make sure you get the right structure in place at the outset.